Markets: Guided by the economic releases and trade tensions – BBH

Analysts at BBH suggest that the high-frequency economic data schedule is light this week as what data is coming out is not so important for the policy outlook and will be overshadowed by the equity market performance and the evolution of the trade issue.

Key Quotes

“The eurozone reports February IP figures, and after Germany's downside surprise before the weekend, a weaker report than the median forecast in the Bloomberg survey (of 0.1%) would not surprise.  Following the 1.0% decline in January, it shows that the weakness of the survey data (PMI, ZEW, IFO) has indeed been a fair lead indicator and not simply a technical adjustment.  That said weather appears to have exaggerated the economic pullback.”

“The eurozone trade surplus is expected to have grown in February, and its announcement will not help ease US-European trade tensions.  The exemption from the steel and aluminum tariffs expires at the end of the month.”

“The UK reports industrial output and trade as well.  Sequentially, the UK is expected to report favorable economic news. This will serve to underpin expectations that the Bank of England hikes rates next month.”

“Japan reported its current account figures for February.  The problem from deducing unfair trade practices from its current account surplus as some wish to do is that it is not driven by trade.  The unadjusted current account surplus was JPY2.1 trln in February, near consensus.  Of this surplus, only JPY189 bln (less than 10%) is from the trade balance.  The lion's share of the rest is from income generated by direct and portfolio investment abroad.  This includes royalties, dividends, licensing fees, profits, and interest.”

“The most important US economic report will be the March Consumer Price Index.  Even if the headline is flat, as the median forecast in the Bloomberg survey suggests, the base effect means that the y/y rate will rise to 2.4% from 2.2%. It would be the highest since March 2017.  More importantly, the core rate may be firmer (0.2% on the month), with the y/y rate moving back above 2.0% for the first time since last May.”

“There is room for the market to become more confident of a Fed rate hike.  Bloomberg and CME calculations of the probability of a hike by June is nearly identical at ~78% and 80% respectively.  However, there is a significant difference in the May calculation.  Bloomberg's model suggests there is nearly a 26% chance of a hike at the May meeting, the CME model has it at 1.6%.  The effective Fed funds rate, which the contract settles at, has been steady at 1.69% this month but was 1.68% after the hike until quarter- and month-end.”

“In any event, the implied yield of the May contract at the end of last week was 1.685%, which is where one would expect it on no change in policy.  There was no signal from Powell that there was a greater sense of urgency as rates hikes at back-to-back meetings would imply.  Neither the volatility in equities, the high-frequency data, nor the impact of the continued rise in LIBOR looks set to derail the Fed's course, for which recent doves like Brainard and Evans appear to have been won over.”